Greenspan: flexibility crucial to economy
(AP)
Updated: 2005-10-12 21:15

The country's ability to weather a surge in energy prices is the latest example of how economic flexibility helps prevent serious recessions, Federal Reserve Chairman Alan Greenspan said Wednesday.

Greenspan said an environment of maximum competition has been the driving force in spurring the type of flexibility that has allowed the country to withstand a number of shocks over the past two decades with only two mild recessions.

"The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would have produced marked economic contractions, offers the clearest evidence of the benefits of increased market flexibility," Greenspan said in remarks to the National Italian American Foundation.

Wall Street investors have given Greenspan credit for the economy's good performance during this time period for his skillful handling of a number of economic shocks, from the stock market crash of October 1987, just a few months after Greenspan took office, to the rate cuts he engineered during the height of the Asian currency crisis in 1998.

While Greenspan mentioned these events in his speech, he ascribed the economy's ability to avoid steep recessions to overall market flexibility rather than good policies at the Federal Reserve.

"Most recently, the flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years," Greenspan said.

"Although the business cycle has not disappeared, flexibility has made the economy more resilient to shocks and more stable overall during the past couple of decades," he said.

Since Greenspan took office in August 1987, the U.S. economy has undergone only two mild recessions, one in 1990-91 when oil prices surged after Iraq invaded Kuwait and the most recent one in 2001 when the bursting of the stock market bubble helped push the country into a downturn.

As he did in a speech on the same topic on Sept. 27, Greenspan said it was important to understand that the long stretches of economic stability can create other problems.

"To be sure, that stability, by fostering speculative excesses, has created some new challenges for policy-makers," he said.

While Greenspan did not elaborate, he in recent months has been warning about risks borrowers could face after an extended period of extremely low interest rates. He has warned that some homeowners who used exotic interest-only loans to buy their homes could be in trouble as interest rates start rising.

Greenspan cautioned against government action to take away flexibility, such as by erecting barriers to protect U.S. industries and workers from global competition.

"Protectionism in all its guises, both domestic and international, does not contribute to the welfare of American workers," Greenspan said. "At best, it is a short-term fix at a cost of lower standards of living for the nation as a whole."

Instead, Greenspan argued that what the government should be providing is increased education and training for workers who lose their jobs because of foreign competition.